Sunday, March 20, 2011

Wabtec is a Good GARP Stock Exposed to Increased Rail Spending

 




Wabtec $WAB is the sort of stock that should be bought in these uncertain times. The company is a provider of a range of products to the freight and passenger transit rail markets. As such, its demand drivers are increased car load traffic and the new production of railcars. The former is usually caused by increased economic activity and the latter by new investment in rail and/or new investment in railroad infrastructure.
Wabtec is the only company on the New York Stock Exchange which has seen its share price rise, every year, for the last ten years. It is highly cash generative and boasts an impressive track record, combining cycle growth and the ability to cut working capital in a downturn. Over the last few years Wabtec has used its cash flow generation to make accretive acquisitions and the business has longer term prospects to expand internationally and benefit from emerging market growth.
Within the last few years in the US, freight has grown strongly whilst transit has been flat and this is largely a consequence of budget issues at transit agency customers. Obama has been asking for additional funding and has been aggressively pushing plans for high speed rail. That said, it is probably better to think of these initiatives (high speed rail etc) as potential upside rather than baking them into forecasts

Wabtec Long Term Growth Drivers

Firstly, increasing urbanisation (particularly in emerging markets) should fuel growth in intercity rail investment. Similarly, greater globalisation and production shifts will encourage the necessity for increased mobility in both transit and freight markets.

Secondly, railways are a more energy-efficient way to move people around. The US is such a huge consumer of gasoline partly because it was built on highways rather than railroads.

Thirdly, railway infrastructural spending is a great way to secure job growth and also encourage greater efficiency in transport.

Fourthly, Wabtec's freight demand should see increases with the expected growth in transport of bulky materials like grains and coal in the US. Not only are food and energy requirements growing, but the US looks set to export more (wheat etc) and this requires transportation to external hubs.

Finally, there is a clear need for ongoing infrastructure investment in railroad networks in emerging markets.

Wabtec is well placed in the service, renewal and replacement market and the continued global expansion of rail networks should see increases in the global fleet. A quick look at sales and earnings growth over the last few years reveals that margins have grown well...

(m)200620072008200920102011E2012E
Sales1,0881,3601,5751,4021,5071,6901,840
growth25.1%15.8%-11.0%7.5%12.1%8.9%
Gross Profit197370427393449490534
Gross Margin18.1%27.2%27.1%28.1%29.8%29.0%29.0%
Net Income85110131115123141165
EPS1.762.232.672.392.562.943.44
growth26.7%19.7%-10.5%7.1%14.8%17.0%
Source: Company Results, Analyst Estimates, Earnings View

...and as discussed previously, Wabtec does a great job in cash flow conversion...

(m)200620072008200920102011E2012E
Operating Cash Flow151143159162176200234
% Net Income178%130%122%141%143%142%142%
Capex21202018212527.6
Free Cash Flow130122140144155175207
growth-6.1%14.4%3.1%7.8%12.8%18.0%
Source: Company Results, Analyst Forecasts, Earnings View


Wabtec Evaluation
 Any stock needs to be evaluated on a risk/reward basis and it is no different with Wabtec. However, this stock represents a relatively safe way to acquire an earnings and cash flow stream. It should be compared to a US ten year note and a risk premium attached to it. That said, if Wabtec hits targets than there is a strong case for it being fairly valued at present...
 
Ratio2006200720082009201020112012
P/E32.725.821.524.122.519.616.7
FCF/Sales12.0%9.0%8.9%10.3%10.3%10.4%11.2%
FCFYield4.7%4.4%5.1%5.2%5.6%6.4%7.5%
FCF/EV4.5%4.2%4.8%5.0%5.4%6.1%7.2%
Source: Company Reports, Analyst Forecasts, Earnings View

...and ‘fairly valued’ is fine because if it hits earning forecasts then the stock price should be able to ‘do its earnings’.
Wabtec was added to the portfolio at $56 with a $64 price target.